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Omnova 2Q 2015 results: expands operating margins, reaffirms full-year guidance

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Omnova 2Q 2015 results: expands operating margins, reaffirms full-year guidance

June 30, 2015 - 07:57
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BEACHWOOD, OH, June 30, 2015 (Press Release) -OMNOVA Solutions Inc. today announced net income of $3.9 million, or $0.09 per diluted share, for the second quarter ending May 31, 2015, compared to net income of $3.4 million, or $0.07 per diluted share, for the comparable period last year. Adjusted Income From Continuing Operations was $5.2 million, or $0.11 per diluted share, for the second quarter of 2015, compared to second quarter 2014 Adjusted Income From Continuing Operations of $4.0 million, or $0.09 per diluted share (See Table B). The increase was driven primarily by year-over-year margin expansion in both the Performance Chemicals and Engineered Surfaces segments, and favorable net inventory valuation adjustments in Performance Chemicals.

"We are pleased with the margin expansion in both of our business segments in the second quarter," said Kevin McMullen, OMNOVA Solutions' Chairman and Chief Executive Officer. "Overall, we expanded Adjusted Segment Operating Profit margins for the third consecutive quarter, with Adjusted Segment Operating Profit margins in the second quarter of 2015 expanding by 240 basis points to 9.6%. Engineered Surfaces continued to expand Adjusted Segment Operating Profit margins, increasing 290 basis points to 9.7% in the second quarter. Performance Chemicals reported a year-over-year increase in Adjusted Segment Operating Profit for the first time in eleven quarters. Overall, Adjusted Segment Operating Profit increased 10.5% to $21.1 million as a result of margin increases and favorable net inventory valuation adjustments.

"Revenue declined in the second quarter compared to last year, primarily as a result of contract- based index price reductions related to declines in raw material costs. Foreign exchange weakness, primarily related to the Euro, also unfavorably impacted sales. While volume declined modestly overall, we were encouraged by volume increases in key specialty lines of business including laminates, nonwovens and home & personal care. Although oil & gas volumes were down compared to last year, we continued to see stable volume in high pressure, high temperature applications. Order rates appear to be strengthening in key specialty lines as we enter the second half of the year," continued McMullen.

"In early June, we announced two strategic actions designed to help us more quickly achieve our goal of sustainable double-digit operating profit margin for each of our segments. The first action was the acquisition of New Fluid Solutions, a specialty drilling chemical company based in Houston, Texas. Although the acquisition is small, its product line complements our existing product line, saves years of research and development on similar products, provides critical lab and production capabilities, and avoids new capital investments we otherwise would have made. It gives us access to a new group of land-based drilling customers and enhances our presence in the critical Houston-based oil & gas market.

"The second action we announced was the Performance Chemicals footprint realignment and Company-wide SG&A restructuring. We will close manufacturing at our styrene butadiene (SB) latex plant in Calhoun, Georgia and also close excess SB capacity for traditional core paper and carpet products at our Mogadore, Ohio facility. All SB latex manufacturing for paper and carpet will transition to our Green Bay, Wisconsin site, the most modern - and highly cost competitive - SB plant in the industry. The Mogadore plant will concentrate on producing SB latices for specialty growth applications. We expect these actions to take OMNOVA's styrene butadiene capacity utilization to over 90 percent. We also are redesigning our Performance Chemicals marketing, selling and product development activities in addition to the recent restructuring of the chemicals leadership team. We expect these changes to help us drive longer term volume growth in our key specialty lines of business at a faster pace. Additionally, we are reducing our SG&A expenses across the Company, primarily through position eliminations and efficiency and effectiveness initiatives. With these latest cost reductions and the previously announced Akron plant emulsion manufacturing closure, ultimately we expect to reduce costs between $14 million and $17 million annually, primarily benefiting the Performance Chemicals segment.

"These actions are clear, decisive and focused on our strategy, which includes four major elements: (1) Stabilize the traditional core businesses and drive margin expansion and improved cash generation, (2) Accelerate profitable growth in key specialty businesses such as specialty coatings, oil and gas, laminates, nonwovens and elastomeric modifiers, (3) Drive improved return on investment, and (4) Deploy a balanced capital allocation policy," said McMullen.

"We are confident that these actions will result in a significant improvement in business performance and support sustained margin expansion and profitable growth," McMullen concluded.

Consolidated Results for the Second Quarter of Fiscal 2015

Net sales decreased $46.2 million, or 17.3%, to $220.2 million for the second quarter of 2015, compared to $266.4 million for the comparable quarter last year. The sales decrease was the result of $26 million or 9.8% of reduced pricing, driven primarily by contract-based index pricing in certain markets tied to raw material price declines; $8.1 million or 3.0% of unfavorable currency translation effects, primarily from the decline of the Euro; and lower sales volume of $12.2 million or 4.6%, primarily in paper, carpet, oil & gas and coated fabrics. These declines were partially offset by increasing volumes in nonwovens, laminates, tire cord, specialty rubber and home & personal care.

Gross profit in the second quarter of 2015 increased to $52.9 million, or 24.0% of net sales, compared to $52.6 million, or 19.7% of net sales, in the comparable quarter last year. The increase in gross profit was due primarily to expanding margins and favorable net inventory valuation adjustments, partially offset by the unfavorable volume and foreign exchange.

Selling, general and administrative expense (SG&A) in the second quarter of 2015 was $32.0 million, compared to $31.5 million in the second quarter of 2014, reflecting successful expense management efforts as well as increased investments in sales and marketing resources for OMNOVA's specialty lines of business.

Interest expense in the second quarter of 2015 was $6.8 million, down $0.9 million from the comparable quarter last year, reflecting the lower outstanding debt balance resulting from the $50 million prepayment of the Company's outstanding Senior Notes in November 2014.

Other Expense (Income), net was $1.4 million expense for the second quarter of 2015, compared to income of $1.4 million in the comparable quarter last year. Included in the second quarter of 2015 are expenses of $1.5 million related to the Company's operational improvement programs, and included in the second quarter of 2014 was the gain of $0.7 million related to the settlement of a note receivable.

Income tax expense was $0.6 million for the second quarter of 2015, compared to $1.5 million in the second quarter of 2014. The effective tax rate for the second quarter of 2015 was 16.7%, compared to 28.3% in the second quarter of 2014. The reduction in the effective tax rate for the second quarter of 2015 as compared to 2014 results from a changing mix of jurisdictional income, whereby the income in the U.S. compared to worldwide income is reduced in 2015. This reduction primarily relates to expected restructuring and other costs to be incurred in the U.S. during 2015 related to the manufacturing footprint and SG&A initiatives. Cash tax payments in the U.S. over the next few years are expected to be minimal as the Company has approximately $115.1 million of U.S. federal net operating loss carryforwards and $113.9 million of state and local tax net operating loss carryforwards with expiration dates between 2021 and 2034.

Cash flow from operations provided $17.9 million in the second quarter of 2015 as compared to $3.8 million used in the same period last year, reflecting the effect of lower raw material costs and internal initiatives to reduce working capital. Working capital days were 55.0 days compared to 60.2 days in May of last year, down 5.2 days. The Company has begun implementing its working capital reduction initiative designed to consistently reduce the amount of working capital deployed in the business.

Through the end of fiscal 2016, the Company expects to incur total charges of approximately $16 million to $20 million to secure the $14 million to $17 million of annual savings from the manufacturing realignment and SG&A restructuring, of which approximately $7.0 million to $9.0 million will be non-cash charges related to manufacturing assets that will no longer be used. Severance charges ranging from $5.0 million to $6.0 million and production transition, facility conversion, and other associated costs ranging from $4.0 million to $5.0 million are expected to result in cash expenditures of $9.0 million to $11 million. These charges will be excluded from reported Adjusted Segment Operating Profit and Adjusted Income From Continuing Operations.

Performance Chemicals Segment Results

Net sales during the second quarter of 2015 decreased $42.8 million, or 21.1%, to $160.1 million, compared to $202.9 million in the comparable quarter last year. The decrease in net sales compared to the prior year was due primarily to reduced pricing of $26.6 million, or 13.1%, which was driven by contract-based index pricing in certain markets and other price declines, both related to the lower raw material costs. Net sales in the quarter also were impacted by unfavorable currency translation effects of $7.8 million or 3.8%. Volume was unfavorable by $8.4 million, or 4.1%, driven by oil and gas and carpet, as well as paper, due primarily to the 2014 closure of a paper customer's mill. The volume declines were partially offset by volume increases in nonwovens, tire cord, home & personal care, and specialty rubber. While carpet volume was down for the quarter, it was up year-to-date.

Segment operating profit was $13.3 million for the second quarter of 2015. Adjusted Segment Operating Profit was $15.3 million for the second quarter of 2015, compared to $14.8 million for the same period in 2014.

Adjusted Segment Operating Profit margins continued to increase during the quarter as lower raw material costs more than offset the lower selling prices, which were driven primarily by contract-based index price adjustments related to reductions in raw material costs. Declines in the Euro negatively impacted operating profit by approximately $1.0 million. Year-over-year, net inventory valuation adjustments were $2.2 million favorable in the quarter. For the second quarter, Performance Chemicals recorded a favorable net inventory valuation adjustment of $1.4 million, compared to an unfavorable net inventory valuation adjustment last year of $0.8 million. During the first six months of fiscal 2015, Performance Chemicals recorded unfavorable net inventory valuation adjustments of $4.8 million, compared to favorable net inventory valuation adjustments last year of $2.1 million, representing an unfavorable net inventory valuation adjustment of $6.9 million year-over-year, reducing segment operating profit. Butadiene prices have been stable, while styrene prices have recently risen.

Specialty Chemicals (oil & gas, coatings, home & personal care, nonwovens/textiles, elastomeric modifiers, tape and adhesives) product line sales decreased $15.6 million, to $74.3 million, for the second quarter of 2015, compared to $89.9 million for the comparable period last year. The decrease was driven primarily by $6.1 million of reductions in pricing, which was mostly associated with declining raw material costs; $4.9 million in unfavorable currency translation effects; and $4.6 million from lower volume, primarily associated with the non-deepwater segment of oil & gas. Certain higher growth specialty product lines, including nonwovens and home & personal care, generated volume increases.

Performance Materials (paper, carpet, specialty rubber, antioxidants and tire cord chemicals) product line sales decreased $27.2 million, to $85.8 million, for the second quarter of 2015, compared to $113.0 million for the comparable period last year. The decrease was due to reduced pricing tied to lower raw material costs of $20.5 million, $2.9 million from unfavorable currency translation effects, and $3.8 million in lower volumes. Paper volume was down 9%, primarily as a result of the closure of a customer's mill in the fourth quarter of last year. Carpet volume was down 7% in the quarter, primarily reflecting the timing of orders. Year-to-date, carpet is up 6%. The Company expects modest increases in carpet volume over time. For the quarter, tire cord volume was up 2%.

Engineered Surfaces Segment Results

Net sales were $60.1 million during the second quarter of 2015, a decrease of $3.5 million, or 5.5%, compared to $63.6 million in the comparable quarter last year. Pricing and mix were favorable by $0.6 million, while foreign currency translation was unfavorable by $0.3 million, and volume was down $3.8 million. The volume decline was due to lower sales in China in the coated fabrics business, reflecting a slowing in the Chinese automotive market.

Segment operating profit was $4.9 million for the second quarter of 2015. Adjusted Segment Operating Profit was $5.8 million for the 2015 second quarter, compared to $4.3 million in the same period last year. The year-over-year improvement was due primarily to margin expansion and favorable mix. (See Table A.)

Laminates and Performance Films product line sales continued to increase and were $38.1 million in the second quarter of 2015, an increase of $0.5 million compared to the comparable quarter of last year. Laminates saw continued growth in several key markets including RV, Store Fixture and Flooring.

Global Coated Fabrics product line sales were $22.0 million in the second quarter of 2015, down $4.0 million compared to the same period last year. The decline was due primarily to the Chinese automotive market, partially offset by increased sales from OMNOVA's Thailand operations.

Outlook

The Company continues to expect significant growth in Adjusted Diluted Earnings Per Share for the full 2015 fiscal year. Initiatives underway and other factors that are expected to contribute to this improvement include continued improved margins, positive net inventory valuation adjustments driven by stable raw material pricing, various cost reduction measures and volume growth in OMNOVA's specialty businesses.

[For the full report, click here.]